Deductible or Not?

The financial costs of running your own business are almost certainly much greater than those for an employee who works for someone else. Luckily for the small business owner, many of these expenses can be claimed as a deduction on federal income taxes – within limits, of course.

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.

Much of the ordinary and necessary test can be satisfied by documentation on what you’re claiming and what your business is. For example, a concrete finishing contractor might have a tough time justifying satellite TV service as an ordinary and necessary expense for his business; but if he was in advertising, that could be a different situation.

Deductible Expenses

Here’s a list of the most common deductions:

  • Bad debts
  • Auto expenses
  • Depreciation
  • Education expenses
  • Employee fringe benefits
  • Insurance
  • Interest
  • Legal, tax preparation and professional fees
  • Pension plans
  • Rent expense
  • Taxes
  • Travel and meals
  • Office in home

Not all these deductions can be taken in their entirety. Most carry limits on their deductible amounts, and other restrictions may also apply.

Nondeductible Expenses

Despite the sizable list of expenses that the IRS will allow to be deducted from taxable business income, there are some that just won’t make the cut. These are the expenses you cannot deduct as a business expense:

  • Charitable contributions
  • Demolition expenses or losses
  • Dues to business, social, athletic, luncheon, sporting, airline, and hotel clubs
  • Lobbying expenses
  • Penalties and fines you pay to a governmental agency because you broke the law
  • Personal, living and family expenses
  • Political contributions
  • Repairs that add to the value of your property or significantly increase its life
  • Bribes or kickbacks

See IRS Publication 334 – Tax Guide for Small Business, for more information on either deductible or nondeductible expenses.